In this report, FedFin continues our assessment of likely changes in financial-industry policy resulting from the GOP takeover in the House and gains in the Senate.  We have previously assessed the outlook for GSE reform (see Client Report GSE118); now, we turn to the outlook for the Federal Reserve.  We believe the central bank will come under political pressure unprecedented since the mid-1980s, with 45 percent of likely U.S. voters stating in this election cycle that they want to break it up.  Democratic control in the Senate and strong support from the Obama Administration will protect the Fed, but the hard fight it had in this Congress (see FSM Report PAYMENT11) fending off senators as diverse as Bernie Sanders (I-VT) and Richard Shelby (R-AL) shows just how tough the going could prove.

In this report, FedFin assesses the structural challenges we anticipate for the Fed, as well as the outlook for measures that could dramatically affect its monetary-policy and emergency-intervention authority. FedFin concludes that, at the least, the Fed will come under relentless attack, in part because Rep. Ron Paul (R-TX) takes over a key subcommittee and advances numerous anti-Fed measures. If Democrats choose to husband their scarce political capital for other fights, the FRB continues its controversial policies and/or faces a new financial-market crisis, significant change could come to the central banks. In the near term, uncertainty will adversely affect the board’s ability to handle its new systemic-risk responsibilities (see FSM Report SYSTEMIC29) as pending appointments will become even more political.  FedFin also expects a renewed attack on the FRB’s role in the payment system.

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